Sunday, August 31, 2008

The Stock Market Improves Before The Economy

Historical data suggests the equity markets improve before the economy begins to show some economic strength. As a result, can investors afford to sit on the sidelines before they see signs of an expanding economy?

Jeremy Siegel, a professor at The Wharton School, notes in his book, Stocks for the Long Run,
"...of the 42 recessions from 1802 to the present (2002), 39 of them, or 93 percent, have been preceded (or accompanied) by declines of 8 percent or more in the total stock returns index. Historically, a bottom in the market has led a trough in the business cycle by about five months.

Investors will have little luck predicting market upturns and downturns because turning points are usually identified months [after] they’ve occurred, not beforehand. In the meantime, they’ll miss out on significant gains. From the bottom of the market to the end of the recession, the stock market has risen an average of about 24 percent (emphasis added)."
(click on chart for larger image)

Certainly there have been false signals; however, if an investor's risk tolerance and asset allocation profile calls for equity exposure, staying in the market is almost a prerequisite to achieving market beating returns. As I noted in an earlier article, Focus On The Long Run, timing the market is very difficult. If an investor is out of the market on those days when the market gaps higher, long run returns will be impacted negatively.

Don't Wait for the Clouds to Break ($)
BetterInvesting Magazine
By: BetterInvesting Editors
September, 2008

Saturday, August 30, 2008

Dividend Aristocrats Performance Through August 29, 2008

Three of the major U.S. domestic indexes (Dow Jones Industrial Average, S&P 500 Index & Nasdaq Composite Index) had a positive return for the month of August. However, the S&P's Dividend Aristocrats did outperform the three aforementioned benchmarks in August and YTD through August 29, 2008.
  • Nasdaq (YTD)= -10.70%
  • S&P 500 Index (YTD) = -12.60%
  • Dow Jones Industrial Average (YTD) = -13.00%
  • Dividend Aristocrats (YTD) = -4.70%
Detail on the performance of the aristocrats is contained in the below spreadsheet. A full copy of the spreadsheet can be accessed by clicking this link.

Thursday, August 28, 2008

September - Historically Worst Month For Market Performance

Many investors believe October is the worst month for equity market returns. This can be partly attributable to the fact some large one day declines have occurred in October. The one market decline many investors think of is Black Monday that occurred on October 19, 1987 when the Dow Jones Industrial Average fell 508 points or 22.6%. In actuality though, the worst month for market returns is September. Although the average return in September is negative, the magnitude of the decline was no worse than -1% to -1.5%.

The below chart from Chart of the Day details the average monthly returns for the Dow Jones Industrial Average for two time periods: 1980 - present and 1950 - present.

Company Dividend Actions Not As Bad As News Would Lead One To Believe

Standard & Poor's maintains a monthly dividend action report on thousands of publicly traded firms. For the 12-month period ending July 31, 2008, S&P reported the number of increases declined 17.4% on a year over year basis. As detailed in the chart below, the number of firms that increased their dividend for this 12-month period totaled 1,601 versus 1,938 increases for the 12-months ending July 31, 2007.

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dividend increase chart 12-months ending July 31, 2008
Although increases have declined by a relatively large percentage, the number of dividend declarations for the 12-months ending July 31, 2008 are only down 1.5% to 35,422 versus 35,950 declarations for the 12-months that ended July 31, 2007. Further, comparing the July, 2008 declarations to the July, 2006 declarations (two years earlier) shows dividends declared are up 1.8% (35,422 versus 34,788). And finally, the July 2008 total represents an increase of 5.9% over the total 33,430 achieved in 2005.

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dividend declarations chart 12-months ending July 31, 2008
In spite of the tough dividend increase period over the last 12-months, the number of companies declaring dividends continue to trend higher on a longer term basis. That is not to say one should not pay attention to the near term dividend activity, but it is important to look at both the near and long term picture.

Standard & Poor's Monthly DividendAction Report (Excel File)

Bullish Investor Sentiment Continues To Decline

The American Association of Individual Investors reported a decline in individual bullish investor sentiment. The level of bullishness feel to 30.68% versus last week's reading of 38.10%. The 8-period moving average actually ticked higher by one point to 34%. Most of the bullishness decline moved into the bearish camp with a reading of 45.45% versus last week's bearish level of 37.30%. This move resulted in the bull/bear spread coming in at -15% versus the prior week spread of +1%.

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Wednesday, August 27, 2008

S&P 500 Earnings Down 29% Year Over Year In Second Quarter

Standard & Poor's reported seconded quarter operating earnings were down 29% for the S&P 500 Index companies with 96% of the companies reporting. This was the fourth consecutive quarter that earnings declined for the index. S&P noted that earnings, ex-financials, were up 3.2%. Earnings contribution has rotated from financials to energy:
"The shift in earnings continues with Energy contributing 25.1% of the S&P 500’s operating earnings during the second quarter, up from 16.4% a year ago," says Howard Silverblatt, Senior Index Analyst at Standard & Poor’s. "Conversely, Financials have now posted their third consecutive quarter of negative earnings after accounting for 28.4% of operating earnings this time last year."

S&P 500 Q2 Earnings Down 29%; Financials Post
Third Consecutive Quarter of Negative Earnings (PDF)

Standard & Poor's
By: David R. Guarino and Howard Silverblatt
August 25, 2008

Monday, August 25, 2008

Update On The Market And Lack Of Volume

One of my posts last week noted the lack of volume in the recent market pullback. This low volume was also present in today's market decline. The market seems to be finding support at the 1,266 area after closing at this level on August 7th, 19th and today. One negative indicator is the MACD faster moving average (12-days) crossed below the slower (26-day) moving average. Will higher volume occur on an up or down day?

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S&P 500 chart August25, 2008
When looking at the percentage of stocks trading above their 50 and 200 day moving averages, the market seems out of sync with the level of the moving average percentages.

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S&P 500 percentage of stocks trading above 50 day moving average
S&P 500 percentage of stocks trading above 150 day moving average
The question is whether the market responds like it did in late 2006 or late 2007. Given the lower level of the market and the potential end to the election uncertainty, I expect a market reaction like that in 2006. One big wild card is the slowing global economy and the stress still present in the fixed income markets. The economic outlook could improve with stabilization of commodity prices and the positive impact this would have on consumer spending.

Sunday, August 24, 2008

The Media And The Market Often Disconnected

(I originally posted the following article on The DIV-Net website on August 17, 2008.)

I recently read an article by Dick Davis of the famed Dick Davis Digest titled, The Stock Market and the Media: Turn It on, But Tune It Out, that essentially highlights the fact the news media tends to be out of sync with future market action. Dick Davis is also the author of The Dick Davis Dividend. My take on his media article is the news media tends to focus on short term news information that sometimes tends to impact a stock's price. However, the long run direction of a stock's price is going to be impacted by long term trends impacting a company's business.

Dick Davis makes the point that:
Part of the problem is that, while some news does involve sharp and sudden stock reactions (only when it involves surprise), most of the never-ending flood of daily news is routine, insignificant and meaningless in terms of durable impact. It is important to PR firms, journalists, TV reporters and traders because it gives them a means of making a living. But to the long-term investor, it is little more than filler and noise.

...The truth is that, except in cases of obvious causality (when the news triggers an immediate and decisive reaction), we never know for sure why the market or a stock does what it does. Since a stock is bought and sold by thousands of individuals every day, it’s reasonable to assume there is more than one reason causing its behavior. In fact, there can be a myriad of reasons, some knowable, others not knowable. Buy and sell decisions are often motivated by a host of non-news-related, silent triggers that are rarely cited by the media.
The article notes six points that should be alluded to in news reports trying to explain the gyrations in the market:
1. The stock market itself is the all-powerful final arbiter. The day, hour, or minute it feels the rubber band has been stretched too far, it’ll do something about it, not before.

2. Human emotions, responding to the markets’ gyrations and triggered by fear and greed, likely play a key role.

3. Worries over a wide range of overlapping factors, both fundamental and technical, may or may not be additional influences. (Future market historians may well cite long-standing housing and credit worries as major factors in shaping the market’s trend. The significance of their role on the particular day of July 26, however, is unknowable.)

4. A market that acts randomly and irrationally cannot be explained logically.

5. Except in cases of surprise, most news is irrelevant in explaining the market’s action on a particular day. The stock market leads; the news follows.

6. The answer to the question, “Why today?,” is: “I don’t know—nor does anyone else.” The markets are complex and perverse. They defy definitive answers.
As an investor then, remember the news media is most often reporting on events that are of a short term consequence and have occurred in the past. Certainly this is not the case with all news reports, but I do believe it is the case with most. An example of this might be the cover article I read on oil that appeared in a BusinessWeek magazine a few months ago. The word "Oil" took up a large portion of the cover. Well, the bubble in oil seems to be popping.


The Stock Market and the Media: Turn It on, But Tune It Out
The American Association of Individual Investors
By: Dick Davis

Saturday, August 23, 2008

Slowing Global Economy And Stronger Dollar A Headwind For U.S. Multinational Firms

With a slowing global economy and a recent strengthening in the U.S. dollar, U.S. multinational companies could face an earnings headwind going forward.

global GDP growth by country June 2008As I noted in an earlier post, S & P 500 Company Sales Increasingly International, Standard & Poor's reported the percentage of 2007 sales for S&P 500 companies that come from foreign countries has increased since 2006 to 45.8% versus 43.6%, respectively.

A recent report from S&P's The Outlook website notes:
...the energy and information technology sectors derived the highest percentage of their 2007 sales abroad, 55.7% and 55.4% respectively...For the year 2007, the health care and materials sectors reported the largest annual year over year increases of 22.7% and 20%, respectively.

percentage growth international sales by S&P 500 sector
During the first half of 2008, U.S. multinationals enjoyed the effects of positive foreign exchange. The U.S. Dollar Index traded at an average discount of 11.7% to the levels seen in the first half of 2007...At its current level of 76.3 (as of August 14), the U.S. Dollar Index is trading about 0.7% shy of its fourth quarter 2007 average of 76.8.

Dollar Index August 22, 2008Unless the dollar quickly resumes its decline, U.S. multinationals will enjoy a much smaller positive currency translation in the fourth quarter of 2008 than they did in the first half of 2008. This will erode the value of their foreign sales, since the latter will be converted into fewer U.S. dollars when the funds are repatriated.
The one positive for many firms is the rapid decline in oil prices though. Petroleum based commodities are used in a wide array of products and companies should see less cost pressure as oil continues its descent. The dollar and oil prices seem to be negatively correlated at the moment and I expect oil prices to continue to fall.


Flagging Sales Abroad
The Outlook
By: Alec Young
August 22, 2008

World Economy Shows New Strain ($)
The Wall Street Journal
By: Justin Lahart in New York, Alistair MacDonald in London and Marcus Walker in Berlin
August 15, 2008

Friday, August 22, 2008

Need More Volume

The S&P 500 Index remains in a downtrend since the market correction began in October of last year.

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S&P 500 chart one year as of August 22, 2008
On a shorter term basis though, the market is attempting to move higher as detailed in the chart below. It seems one missing element is the lack of volume on the S&P Index.

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S&P 500 chart six months as of August 22, 2008
As noted in one of my earlier post, Sell in May and Buy in November, the market has a tendency to be weak during the May through November time period. One reason cited for this phenomenon is many investors and traders take vacations during the summer months.

A large amount of cash still remains on the sidelines that could find its way into equities. The Investment Company Institute reports a continued increase in cash in money market funds. As of August 20, 2008, cash in money market funds totaled $3.5 trillion dollars. At year end 2007 money market cash equaled $3.1 trillion dollars and this was up from $2.3 trillion at year end 2006. I will be watching trading volume as we get closer to the 4th quarter and the election.

Thursday, August 21, 2008

Investor Sentiment And The Bull/Bear Spread

The August 20th investor sentiment survey conducted by the American Association of Individual Investors, indicated bullish investor sentiment declined to 38.1% versus last week's level of 42.86%. The current reading fell below the long-term average bullish reading of 39%.

investor bullish bearish seniment table August 20, 2008The bull/bear spread did indicate more bearishness as well with the spread reported at 1% versus last week's 4%. As the below chart notes, extreme or low investor bullish sentiment historically occurs when the spread is -30% or lower. This extreme lack of bullishness has coincided with a number of market bottoms in the past. Market tops have tended to occur when the spread rises above 30%.

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The Bull/Bear spread has narrowed to the 1% level versus -33% in mid July. Investors seem to be uncertain about the market direction as the bullish sentiment level has flucuated in a range of 22% to 32% sine the mid July date.

Gold Speculators Rush In?

From a pure technical perspective, the parabolic rise in gold may be partially due to the flood of speculators into the commodity. This may not be too dissimilar to the recent spike in oil and oil futures trading.

The August 21st article in The Wall Street Journal titled, The Eagle Has Been Grounded ($), notes the U.S. Mint stopped selling the American Eagle gold coin because the mints inventories have been depleted. The Journal noted:
"Due to the unprecedented demand...our inventories have been depleted," the Mint -- part of the U.S. Treasury Department -- told its dealers Friday. "We are therefore temporarily suspending all sales of these coins."... The Mint has sold 311,000 ounces of gold coins this year which is about 50% more than was sold in 2007.
Gold chart 1975 to 2008
When the speculators head for the exit, one could see a rapid decline in the price of gold.


The Eagle Has Been Grounded ($)
The Wall Street Journal
By: Ianthe Jeanne Dugan
August 21, 2008

Monday, August 18, 2008

The Long And Short For Crude Oil

From a pure technical perspective, it appears the steep run up in crude prices has come to an end. A long list of factors have impacted crude oil prices since 2007:
  • increased global demand
  • geopolitical concerns
  • speculative investing (?)
The sharp uptrend in crude prices that began in the second quarter of this year broke through support in mid July when WTI crude declined to $131 per barrel. The next level of support would be a price just below $110.

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West Texas Crude Oil graph 2006-2008From a longer term look at crude prices, it appears the barrel price could be headed for a level below $100.

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West Texas Crude Oil graph 1998-2008
If crude does continue to pullback, this will free up consumer cash flow for purchases beyond filling their automobile gas tank. Spreading the consumer wallet to sectors outside of energy would have a positive impact on economic activity.

Data Source: Energy Information Administration

Sunday, August 17, 2008

International Dividend Payers Can Diversify Portfolio

Dividend growth stocks are not only a U.S. company phenomenom. More investors are looking to non-U.S. investments for dividend growth investment opportunities. For a U.S. investor, access to these types of investments can be obtained via ADRs, exchange traded funds and/or mutual funds.

A recent article in The Wall Street Journal highlighted some foreign dividend opportunities. The Journal article noted the yield on the MSCI EAFE Index of 3.7% is higher than the 2.4% yield on the S&P 500 Index. Also highlighted was the fact that foreign firms tend to pay out more of their earnings to shareholders in the form of dividend payments then U.S. companies. Lastly, the Journal indicates:

...there are 22 foreign dividend-oriented exchange-traded funds, mostly launched since 2006. Sixteen of these are from WisdomTree Investments Inc., a company which subscribes to the research of Jeremy Siegel, a professor at the University of Pennsylvania, who believes that dividends are the most objective way to value a company.

The ETFs go from broad ones, such as the PowerShares International Dividend Achievers Porfolio (PID), launched in 2005 and yielding 4.1%, to specialized ones such as the WisdomTree International SmallCap Dividend (DLS), which currently yields 2.6%. These are two of the largest such ETFs, with slightly more than $460 million in assets.

The foreign-focused fund with the highest yield currently is Henderson Global Equity Income (HFQAX), with a 12-month yield of 8.8%, followed by the iShares Dow Jones EPAC Select Dividend ETF (IDV) with an 8.3% yield. The highest-yielding fund may not be suitable for all investors. For instance, the iShares DJ EPAC ETF has 50% of its assets in financials.

As is the case with U.S. dividend growers, many of the international funds are concentrated in the financial sector. An investor should evaluate the appropriateness of these fund investments to insure the sector allocation is in line with the goals and objectives of ones overall investment expectations.


The Dividends From Far, Far Away
The Wall Street Journal
By: Shefali Anand
August 16, 2008

The Dollar, Oil and Equity Prices

(I originally posted the following article on The DIV-Net website on August 10, 2008.)

Many critical factors are having dramatic moves of late that could impact the future direction of stock prices. In this article I will address factors an investor should consider as a result of declining oil prices and a strengthening dollar. Several weeks ago I did post an article on my blog dealing with the potential currency impact for international investments titled, Be Aware Of Currency Impact With International Investments. Below I will look at factors that will impact U.S. firms.

The price of a barrel of oil reached nearly $150 in early July. Fast forward to today and the barrel price of oil is around $115. This represents a 23% decline in per barrel oil prices in just one month. From my perspective, one does not see price moves of this magnitude unless speculative investing was a part of the recent rise in oil prices. With respect to the dollar, a peak in dollar weakness seemed to be reached in early July when one Euro was equal to 1.59 U.S. Dollars. Over the course of the last month the Dollar has experienced significant strengthening closing at 1.50 dollars per Euro on Friday. Why does all of this matter?

As one evaluates the attractiveness of potential investments, attempting to understand the impact macroeconomic factors such as changes in commodity (oil) prices and currency are important. Unfortunately, the outcomes are not black and white.

As the below chart details, oil and the S&P 500 Index seemed to be highly correlated from early 2007 through August of 2007. However, from late 2007 through July 2008, oil and the S&P 500 Index seemed to have a high negative correlation.

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oil and S&P 500 index stock chart August 2008
Is it possible that oil was at such an extreme over valuation that its negative impact to company input cost caught some firms unprepared. If so, the reduced level of oil and related energy inputs could have a strong positive impact to future earnings growth. This would be a positive for multinational firms that could be facing a headwind due to increasing strength in the U.S. Dollar.

As noted earlier, the dollar has strengthened against the Euro over the course of the past month. As the below chart portrays, a weak dollar (upward sloping red line) and a rising S&P 500 Index seem to go hand in hand. What could be partially at play here is the fact companies in the S&P 500 Index generate a large portion of their earnings (over 40%) from international sources and this has been growing. A weak dollar provides a positive earnings boost to U.S. companies as they convert foreign earnings back into the U.S. Dollar.

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US dollar and S&P chart August 2008
If a weak dollar is good for U.S. stocks, then the recent U.S. Dollar strength will likely serve as a headwind for U.S. multinational firms. The offset though, and I think this could be a stronger influence, is the reduction in oil and other commodity costs. Reduced commodity inflation will benefit company earnings via reduced cost of sales. Also, lower commodity prices will take the pressure off of inflation and stimulate more positive consumer sentiment.

Undoubtedly, there are many more factors that will impact stock prices, interest rates, the real estate market, etc.; however, getting a handle on the oil and currency impact to company earnings will go a long way in accurately forecasting future earnings growth. Keep in mind though, some companies have aggressive currency and oil hedges in place in an attempt to mitigate the volatility these price swings have on corporate financial results. Reading company 10-Qs and 10-Ks will provide more insight into some of these factors.


The Dollar-Euro Exchange Rate and U.S. Stocks
CXO Advisory Group
October 17, 2007

Saturday, August 16, 2008

Bullish Investor Sentiment And Market Move Higher Over Past Month

Individual investor sentiment surveys are viewed as contrarian indicators. At times when investor bullish sentiment is at its lowest, the indicator would suggest the market is near a bottom. Conversely, when the bullish sentiment reading its at a high level, tacticians would suggest the market is topping.

Since mid July, the S&P 500 Index has increased from 1,244 to 1,285 on August 13th. This represents a 3%+ increase. During this same time period, the bullish sentiment increased from 22.17% to 42.86% on August 13th. Over this same 30-day period the 8-period moving average of bullish sentiment has remained essentially unchanged at 23-33%. On the other hand, the bull/bear spread over this same time frame has increased from -33% on July 10, 2008 to +4% on August 13th. It appears investors were the least bullish on the market at a time when the market was actually bottoming.

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Wednesday, August 13, 2008

Companies With Large Increases In Dividend

The Wall Street Journal's Markets Data Center includes stocks that have instituted large dividend increases. The below table details some recent fast growers from the Journal's site. I would not invest in one of these companies until a thorough analysis is performed on a particular company.

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Will The Recent Pullback In REITs Provide A Buying Opportunity?

Over the course of the last thirty years, REITs have outperformed the S&P 500 Index.

According to recent commentary from Chart of the Day, "...the current correction in REITs is comparable to that of the more dramatic corrections of the past 35 years." Does the recent correction in REITs provide an investment opportunity?

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IYR chart August 13, 2008
There are a number of risks with real estate investments though. Some of the retail mall REITs and industrial REITs could remain under pressure if consumer spending remains constrained and the economy remains in a slow growth mode. The National Association of Real Estate Investment Trusts (NAREIT) site maintains comprehensive quarterly data on REITS. Below is some chart data from the April 2008 report (PDF).

The YOY dividend growth rate has remained in the mid single digits.

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Annual Dividend Growth chart for NAREIT Index August 13, 2008
The REIT dividend payout as a percentage of funds from operations does remain below the longer term average payout of 73.75%.

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dividend payout chart for NAREIT Index August 12, 2008
And finally, if there is one event that could derail or delay a potential recovery, it is tighter bank lending standards. As the below chart notes, bank's have indeed tightened their lending.

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Bank lending standards chart
In the end opportunities may be uncovered in some REIT investments that have lower levels of leverage, stronger FFOs and operate in stronger real estate segments.

NAREIT Chart Book (PDF)
National Association of Real Estate Investment Trust
April 2008

Monday, August 11, 2008

S&P 500 Index In Short Term Uptrend But Longer Term Downtrend

From time to time I include technical chart information for stocks and indexes in blog posts. Primarily, I believe fundamental analysis is the most important type of research to perform in uncovering investment opportunities. Before making investments though, the technicals underlying particular stocks and/or indexes can be important in understanding the sentiment of the market or sentiment of investors. Following are a couple of links to articles describing the differences between technical and fundamental research:

Stock Market Technical Analysis Versus Fundamental Analysis, In Pictures

About halfway down the right hand column of the Alpha Global Investors website is a list of links to several articles on technical analysis under the heading: How to Chart Stocks.

A quick look at today's market action for the S&P 500 Index indicates the price movement was bullish in the sense the index closed at 1,305 which is above the 50-day moving average of 1,295. This short term advance that began in early July continues to occur within a longer term down trend for the market. Additionally, the advance is occurring on increasingly lower volume. The market and chart would indicate the index wants to move up to the 200-day moving average, but high volume would lend more support.

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S&P 500 Index technical analysis chart August 11, 2008
Time will provide the answer. There are several important consumer discretionary stock earnings reports this week. Tuesday, TJX Companies (TJX) reports earnings and Wal-Mart (WMT) reports on Thursday.

(I hold long positions in Wal-Mart and TJX Companies)

Sunday, August 10, 2008

Dividend Focused Equity Portfolio Maintains Real Purchasing Power In Retirement

(I originally posted the following article on The DIV-Net website on August 3, 2008)

The last ten years have been difficult ones for equity investors. The ten year annualized return on the S&P 500 Index as of June 30, 2008 is 2.88%. Essentially, an investor's return has consisted of the dividends received on their stocks. According to a recent report from T. Rowe Price, "since 1980 reinvested dividends accounted for more than half of the total return on the S&P 500 Index." What does all this mean for retirees? An important aspect of dividend growth investments is the ability for these types of stocks to provide a growing income stream that keeps pace with inflation. Additionally, dividend paying stocks tend to be less volatile in down markets. This can be an added benefit if one is relying on their investment portfolio for retirement income.

Recently, T. Rowe Price (TROW) and Ned Davis Research conducted a two part study. The first part compared a dividend paying stock portfolio against the S&P 500 Index. The second part of the study compared the income generated from this dividend paying portfolio compared against a government bond index. The two stock portfolio were comprised of:
...the S&P 500 and one comprising the top 50% of dividend payers in that index each year. Each January the the high yield portfolio was adjusted to include the top 50% of dividend paying companies based on the prior year.
The study parameters are as follows:
The study assumes the investor retired with $500,000 at the end of 1972, just before the 1973–1974 bear market—one of the worst bear markets ever. The investor withdrew 4.5% of assets the first year, with annual inflation adjustments of withdrawals tied to the consumer price index. Annual withdrawals grew from $22,500 the first year to $106,835 in 2007.
As the below chart details, the high yielding stock portfolio supported the inflation adjusted 4.5% initial withdraw rate and allowed the equity portfolio to grow. In the case of the S&P 500 Index portfolio, the portfolio ran out of funds in 2005.

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High Yield Equity Portfolio Value versus S&P 500 Index 1972-2007
In the second part of the T. Rowe Price/Ned Davis Research study, they evaluated the income generated from a bond portfolio versus the high yield stock portfolio noted above. The study value of the portfolios consisted of annual $100,000 contributions beginning at the end of 1972. Additionally, the dividend and interest payments were taken in cash versus having them reinvested. The outcome from this income study was:
In the high-inflation 1970s, as bond yields reached double digits, interest payments substantially exceeded dividend income. But as interest rates declined steadily over the 1980s and 1990s, the dividend payments surged ahead.

Over this entire 35-year period, the high-yielding equity portfolio generated more than twice as much income as the bond portfolio—about $476,000 in dividends compared with about $230,000 in interest income.

Moreover, in terms of principal value, the original $100,000 investment in the stock portfolio had grown to more than $711,000 by the end of 2007, compared with about $121,000 for the bond portfolio.
Graphically, the income flows would appear as noted in the chart below:

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annual income high yield equities versus government bond 1972-2007
For investors, an all equity portfolio may seem too aggressive. However, considering a combination of stocks and bonds in an investment portfolio could provide a certain comfort level while at the same time, allowing for a growing income payment stream that keeps pace with inflation.


Dividends Can Play Key Role In Retirement Income Plans (PDF)
T. Rowe Price Report
Summer 2008

Friday, August 08, 2008

Illinois Tool Works Increases Dividend 10.7%

Illinois Tool Works (ITW) announced a 10.7% increase in the company's 4th quarter dividend. The new quarterly dividend increases to 31 cents per share versus 28 cents per share in the same quarter last year.
  • The company's historical 5-year average dividend growth rate is approximately 17%.
  • The projected payout ratio is 34% based on December 2008 estimated earnings of $3.70.
  • The 5-year average payout ratio is 27%.
(click on table/chart for larger image)

Illinois Tool Works dividend analysis table August 2008
Illinois Tool Works stock chart August 2008

Thursday, August 07, 2008

Bullish Investor Sentiment Trend Continues Lower

The trend in bullish investor sentiment, as reported by the American Association of Individual Investors, continues lower as noted in the chart below. The bullish sentiment level declined to 35.61% versus last week's level of 40.00%. The 8-period moving average of the bullishness level remains just above 30%. The bull/bear spread came in at -7% this week versus -1% last week.

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Wednesday, August 06, 2008

Dividend Aristocrats Holding Up Well In Tough Market

The performance of Standard & Poor's Dividend Aristocrats is holding up well on a year to date basis. Through August 8, 2008, the market cap weighted rate of return for the Aristocrats is approximately -4.4% versus the S&P 500 Index return of -12.2%. Out of the top five performing companies on a year to date basis, three are involved in takeovers: Rohm & Haas (ROH), Wm. Wrigley Jr. Company (WWY) and Anheuser-Busch (BUD). The table below outlines performance data for the Aristocrats. A direct link to the spreadsheet is available at this Aristocrats link.

Tuesday, August 05, 2008

Bulls versus Bears

Although the market remains in a downtrend that began late last year, today saw a nice upward move in the S&P 500 Index by advancing nearly 3%. This is certainly indicative of a market that had become very oversold.

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s&p 500 Index technical analysis chart August 5, 2008
It would be nice to see higher volume come into the market to provide some confirmation of a firmer advance on days like today. On July 15 the S&P 500 Index hit 1,214 and has since advanced over 5% to 1,284. It appears the next critical level will be around 1,300 at which point the index will reach its 50 day moving average.

The chart below shows the % of S&P 500 stocks trading above their 50 day moving average and July was a short term low at 12.02%.

percentage of s&p 500 Index stocks trading above 50 day moving average August 5, 2008

Sunday, August 03, 2008

Do Dividend Paying Stocks Really Underperform The Market?

(I originally posted the following article on The DIV-Net website on July 27, 2008)

I recently ran across an interesting article on Charles Schwab's (SCHW) Market Insights page titled, Dividends: Myths and Realities. The conclusion of the article noted:
"...contrary to conventional wisdom, our research finds that dividend yielding stocks as a group have underperformed the market during recent years..."
The article goes on to state:
"...the rules of the game have changed so much in recent (emphasis added) years that some of the most common strategies for picking dividend-paying stocks no longer appear to work very well."
The Schwab article is one example of why investors need to pay attention to the time period over which returns and research conclusions are based. In the Schwab strategy piece, the period being evaluated is from 1990-2008. Certainly, late in the 1990's, the technology run left many high quality dividend stocks trailing the S&P 500 Index. Then, the bursting of the real estate bubble in 2007 pulled down the financial sector and dividend paying stocks tend to be concentrated in financials. The Schwab article contained the below table that outlines the performance of dividend and non dividend paying stocks over this 1990 - 2008 time period.

(click on table for large image)

dividend paying versus non paying table 1990-2008
Although the above table does show dividend paying stocks under performing non-dividend paying stocks, the risk adjusted returns tell a different story. The level of return for each unit of risk for dividend payers is 1% (15.7%/15.7%). For the non-payers, the return for each unit of risk equals .73% (18.0%/24.6%). Lastly, and Schwab's article does highlight this, the dividend payers are less volatile than the non-payers and the payers exhibit strong outperformance in down markets.

What if one evaluates payers versus non-payers over a longer time period? Ned Davis Research recently published a chart showing just this going back to 1972. And yes, the payers do outperform the non-payers over a longer time period.

(click on chart for larger image)

The return differences result in dramatic differences in the absolute dollar growth of investment portfolios as well. The growth of a $100,000 portfolio invested in 1972 through September 2007 would equal:
  • Non-dividend paying stocks: $240,000
  • Dividend paying stocks: $3,223,000
  • Dividend growers and initiators: $4,059,000
In the end, when evaluating conclusions from research reports and the like, it is important to be aware of the time period being evaluated.


Dividends: Myths and Realities
Charles Schwab & Co.
By: Greg Forsythe, CFA
July 25, 2008

Dividend Paying Stocks: Why This Chart Says It All...
Investment U
By: Mark Skousen
November 14, 2007

Saturday, August 02, 2008

No Place To Hide

Thanks goes to The Kirk Report for pointing me to the following bear market news comment from Bloomberg:
All of the 23 developed nations in the MSCI World Index except for Canada have experienced bear-market plunges of 20 percent or more since September as credit losses surged and record commodity prices stoked inflation. Brazil last week became the 23rd out of 25 developing countries in the MSCI Emerging Markets Index to enter a bear market. Only Jordan and Morocco avoided such slumps.

Be Aware Of Currency Impact With International Investments

International investments can add a diversification element to an investor's investment portfolio. One factor to keep in mind, however, is the amount of return that results from converting foreign returns back into ones home currency (the U.S. Dollar in this case). The resulting impact on returns during strong dollar periods can drastically reduce realized realized returns as noted in the chart below:

(click on chart for larger image)

foreign returns to U.S. Dollar chart July 2008
A recent research report from Charles Schwab (SCHW) notes EAFE (EFA) returns were larger than S&P 500 Index ($INX) returns during the 1980- 1985 period. However, once the EAFE returns were converted back into the dollar, the returns were far less than the S&P 500 Index.
The 1980–1985 period was an exceptional period for international stocks. In local currencies, the EAFE returned a cumulative 126%—well in excess of the not-too-shabby 85% for the S&P 500. However, most international equity funds don’t hedge their currency exposure, and when returns are converted back into dollars, the EAFE return was cut to 43%. In other words, even though foreign markets did well, U.S. investors would have enjoyed only about one-third of that performance, due to the strengthening dollar. The results were even more dramatic from 1995 to 2002. The rising dollar practically wiped out all of the 60% gain that the countries in the EAFE Index generated in local currencies!
Undoubtedly, the U.S. Dollar has weakened significantly since the end of 2006. Even over the course of the last 10-years, the dollar has trended lower.

(click on chart for larger image)

US Dollar to Euro chart 10-years 1999-2008
U.S. Dollar strength and weakness is difficult to predict, but the extended slide over the last few years makes one wonder how much lower can it fall. If the U.S. economy is ahead of world economies from an economic cycle perspective, could dollar strength be around the corner? If the U.S. is poised for an interest rate increase due to anticipated economic strength, this would provide some support for the dollar and result in some strengthening.

In the end, an investor should be aware of the hedging or non-hedging of currencies in their foreign investments.

Too Much Of A Good Thing
Charles Schwab & Co.
By: Mark W. Riepe, CFA
July 17, 2008

Friday, August 01, 2008

S&P 500 Dividend Payers Underperform Non Payers In July

In the month of July, Standard & Poor's reported the dividend payers in the S&P 500 Index underperformed the non-payers on an average return basis, -.56% versus -.21%, respectively. Many of the payers fall into the energy, utility and telecommunications sector and these three sectors were the worst performing sectors in the month of July. For the twelve months though, the payers do have a performance edge over the non-payers, -14.14% versus -16.16%, respectively.

S&P 500 dividend payers versus non payers performance July 31, 2008